While the commercial activity issue in OBB v. Sachs is a cinch (as I discussed here and here), the agency issue is more complicated – and could have far-reaching consequences for FSIA jurisprudence. However, at the end of the day, the Court should reject the parties’ arguments and simply stick with Bancec. That is the wisest and safest choice.

Until the Ninth Circuit’s panel and en banc decisions in Sachs v. OBB, FSIA case law was relatively clear with regard to the appropriate agency analysis in cases involving separate juridical entities. When a plaintiff sought to establish jurisdiction over a foreign state based upon the conduct of a separate juridical entity, courts applied the standard set forth in the Supreme Court’s seminal decision in First Nat. City Bank v. Banco Para el Comercio Exterior de Cuba (“Bancec ”), 462 U.S. 611 (1983). Under Bancec, there is a presumption that the conduct of a separate juridical entity cannot be imputed to the foreign state. SeeBancec, 462 U.S. at 626-27 (stating that “government instrumentalities established as juridical entities distinct and independent from their sovereign should normally be treated as such”); id. at 627 (discussing the “presumption of independent status”); see also, e.g., Doe v. Holy See, 557 F.3d 1066, 1077-80 (9th Cir. 2009); Transamerica Leasing v. La Republica de Venezuela, 200 F.3d 843, 848 (D.C. Cir. 2000). In cases not involving fraud or injustice through the use of the corporate form, the presumption of separateness means that a plaintiff must allege facts (and later prove) that the foreign state exercises day-to-day control over the separate corporation. See, e.g., Dale v. Colagiovanni, 443 F.3d 425, 429 (5th Cir. 2006); see alsoWalter Fuller Aircraft Sales, Inc. v. Republic of Philippines, 965 F.2d 1375, 1381 (5th Cir. 1992). Only in these circumstances will the conduct of the separate juridical entity be imputed to the foreign state. See, e.g., Transamerica Leasing, 200 F.3d at 850-53.

There are at least two reasons to apply the Bancec standard to the FSIA jurisdictional inquiry. First, Bancec’s presumption of separateness serves the principle of comity. “’If U.S. law did not respect the separate juridical identities of different agencies or instrumentalities, it might encourage foreign jurisdictions to disregard the juridical divisions between different U.S. corporations or between a U.S. corporation and its independent subsidiary.’” Bancec, 462 U.S. at 628, quoting H.R. Rep. No. 94-1487, at 29-30 (1976). At the jurisdictional stage, that could result in the United States being pulled into foreign court based upon conclusory allegations that a separate corporation is its “agent,” even though the corporate form was respected and even though the United States did not dominate the corporation’s day-to-day operations.

Second, the presumption of separateness provides a critical check against plaintiffs’ attempts to pierce the corporate veil at the jurisdictional stage. If the actions of separate corporations acting in the United States could be freely imputed to foreign states, foreign sovereigns would be much more frequently drawn into highly burdensome litigation in United States courts based upon a mere allegation of agency. Plaintiffs’ attorneys are often looking for the deepest pockets, and there would be no presumption of separateness to prevent counsel from alleging that a corporation in the United States is an “agent” of the foreign state. By drawing the foreign state into litigation, plaintiffs’ counsel would profoundly undermine the benefits of the corporate form, drive up the settlement values of cases, and get their foot in the door to obtain intrusive discovery from foreign sovereigns – which would vitiate a core protection afforded by foreign sovereign immunity, increase litigation costs and cause significant tensions with foreign states.

Even though Bancec has repeatedly proved to be a workable standard over the past thirty years, the parties and the United States government in OBB v. Sachs have urged the Court to effectively abandon Bancec’s presumption of separateness at the jurisdictional stage. While OBB raises the Bancec issue, its chief argument is that the Court should use 28 U.S.C. section 1603 to determine whether the acts of an entity can be imputed to a foreign state – a meritless argument that I have addressed before.

Sachs and the government, in turn, argue that the Court should apply the standards set forth in the Restatement of Agency (Third). The basic argument of Sachs and the government is that Bancec is an alter ego case, and that it did not supplant the traditional common law agency principles set forth in the Restatement. See, e.g., Brief of the United States as Amicus Curiae 17-18. That contention does not withstand scrutiny.

Let’s start with some basic principles – which are not mentioned in the briefs of the parties and amici in OBB v. Sachs. Under traditional rules governing corporations, corporate entities are presumed to be separate and distinct from their creators or owners. 1 William Meade Fletcher et al., Cyclopedia of the law of private corporations § 25 (rev. ed. 1999). Corporate acts “are the acts of the . . . corporation, and are not the acts of the shareholders composing it, and their powers and duties pertain to them respectively and not to each other[.]” Id. at § 28.

In “no particular is the distinction between the corporation and its members more marked and important than in suing and being sued.” Id. at § 36. Indeed, “limited liability is one of the principal purposes for which the law has created the corporation.” Id. at § 41.20. The rule of limited liability protects the owner or parent of a corporation from being sued for the corporation’s acts. See, e.g., United States v. Bestfoods, 524 U.S. 51, 61 (1998) (“It is a general principle of corporate law deeply ingrained in our economic and legal systems that a parent corporation . . . is not liable for the acts of its subsidiaries.”). The presumption of separateness requires courts to “start from the general rule that the corporate entity should be recognized and upheld, unless specific, unusual circumstances call for an exception. Care should be taken on all occasions to avoid making the entire theory of the corporate entity . . . useless.” Zubik v. Zubik, 384 F.2d 267, 273 (3d Cir. 1967).

There are two exceptions to the general rule of limited corporate liability. The first is alter ego, which requires a plaintiff to “show that the corporate form has been abused to the injury of a third person.” 1 Fletcher, supra, § 41.10. Alter ego is employed “where the corporate entity has been used as a subterfuge and to observe it would work an injustice.” Id. at § 41.10; see also, e.g., Black’s Law Dictionary (10th ed. 2014) (defining the alter-ego rule as the “doctrine that shareholders will be treated as the owners of a corporation’s property, or as the real parties in interest, whenever it is necessary to do so to prevent fraud, illegality, or injustice”). The “rationale behind the theory is that, if the shareholders or the corporations themselves disregard the proper formalities of a corporation, then the law will do likewise as necessary to protect individual and corporate creditors.” 1 Fletcher, supra, § 41.10.

The second exception is the existence of a principal-agent relationship. As the Supreme Court has stated, “'[d]ominion may be so complete, interference so obtrusive, that by the general rules of agency the parent will be a principal and the subsidiary an agent.’” NLRB v. Deena Artware, Inc., 361 U.S. 398, 403 (1960), quoting Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, 95 (1926) (Justice Cardozo).

It is wrong to state that Bancec is only an alter ego case. Instead, the Supreme Court in Bancec set forth both exceptions to the rule of limited corporate liability:

In discussing the legal status of private corporations, courts in the United States and abroad have recognized that an incorporated entity . . . is not to be regarded as legally separate from its owners in all circumstances. Thus, where a corporate entity is so extensively controlled by its owner that a relationship of principal and agent is created, we have held that one may be held liable for the actions of the other. In addition, our cases have long recognized the broader equitable principle that the doctrine of corporate entity, recognized generally and for most purposes, will not be regarded when to do so would work fraud or injustice.

Bancec, 462 U.S. at 628-29 (citations and quotations omitted) (emphasis added). The first exception identified by Bancec is explicitly an agency relationship. Bancec, 462 U.S. at 629, citing Deena Artware, Inc., 361 U.S. at 402-04 (“a relationship of principal and agent”). The second Bancec exception is alter ego. Id. (“work fraud or injustice”); see also 1 Fletcher, supra, § 41.10; Berkey, 244 N.Y. at 95. In other words, contrary to the argument advanced by Sachs and the government, Bancec is not simply an alter ego case. Bancec set forth the standard for both agency and alter ego in cases involving separate corporate entities and foreign sovereigns.

The real question, then, is whether it makes sense to apply Bancec at the jurisdictional stage under the FSIA. As stated above, courts have done so for many years, and Bancec provides a workable standard through which to resolve the imputation issue. Moreover, absent Bancec’s presumption of separateness applied to the jurisdictional inquiry, the floodgates would open to lawsuits against foreign states based upon conclusory allegations of “agency” and “authorization.” As someone who has litigated Bancec at the jurisdictional stage in five separate FSIA cases, I know that Bancec affords a critical protection for foreign sovereigns from frivolous lawsuits and burdensome discovery (a point not mentioned in the briefs of the parties and amici). If the Bancec jurisdictional protection is taken away by the Court, the result will be a major increase in (meritless) lawsuits against foreign sovereigns. There is no reason to go down that path.

In sum, OBB v. Sachs is a piece of cake – if the Court applies its own precedent. The Court should apply Nelsonwith respect to the commercial activity inquiry, and should apply Bancec with regard to the agency issue. If the Court takes that approach, it would avert a major upheaval in this sensitive area of the law – since Nelson and Bancec have been bulwarks of FSIA jurisprudence for decades. The Court would also be avoiding a host of unintended consequences, including increased jurisdiction over foreign torts (in contravention to international law), disregard for the corporate form (with potentially serious comity and foreign relations consequences), and vitiation of several of the core protections afforded by the doctrine of foreign sovereign immunity. The Court got these issues right before in Nelson and Bancec, and the Court could get them right again – simply by following the principle of stare decisis.

OBB v. Sachs is scheduled for oral argument in the United States Supreme Court on October 5, 2015. During the period leading up to oral argument, I intend to publish a series of posts regarding issues in the Sachs case. My general view is that Sachs is an easy case to resolve under Saudi Arabia v. Nelson, 507 U.S. 349 (1993), but that there is potential for a major mistake by the Supreme Court on the critical issue of attribution. I will provide more information on these key points in the upcoming weeks.

Today, I want to focus on an issue that I have discussed before, namely OBB’s argument that the determination of whether an entity is an “agent” of a foreign state should be resolved through the definition of “agency or instrumentality” set forth in 28 U.S.C. section 1603(b). I will not revisit the points I made in previous posts (here and here). I do, however, want to add three points:

(1) OBB did not raise its argument that section 1603(b) controls the inquiry of whether an entity is an “agent” of a foreign state during district court proceedings. OBB also did not raise the argument in its main briefing before the Ninth Circuit Court of Appeals. Instead, OBB raised the issue for the first time during oral argument on en banc rehearing, and was subsequently ordered by the Ninth Circuit to submit supplemental briefing addressing its new argument. SeeSachs v. Republic of Austria, 737 F.3d 584, 594 n. 7 (9th Cir. 2013) (en banc). OBB’s novel argument – which was contrary to FSIA precedent – was thereafter squarely rejected by the Ninth Circuit.Sachs, 737 F.3d at 594-98. That OBB itself did not see fit to raise the issue until oral argument on en banc rehearing fails to inspire confidence, and a closer look shows why OBB’s novel interpretation of the FSIA should have remained on the cutting room floor.

(a) A “foreign state”, except as used in section 1608 of this title, includes a political subdivision of a foreign state or an agency or instrumentality of a foreign state as defined in subsection (b).

(b) An “agency or instrumentality of a foreign state” means any entity—

. . .

(2) which is an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof

. . . .

28 U.S.C. § 1603(a), (b)(2). For OBB’s argument to work, the term “foreign state” in section 1603(b) must include “agencies or instrumentalities” of foreign states; otherwise, under OBB’s framework, an “agency or instrumentality” of a foreign state could never be held to have an “agent.” Yet, as applied to OBB’s situation (that is, the question of whether an entity is an agent of an agency or instrumentality), OBB’s interpretation would effectively yield a statute that states the following:

(b) An “agency or instrumentality of [an agency or instrumentality of] a foreign state” means any entity—

. . .

(2) which is an organ of [an agency or instrumentality of] a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by [an agency or instrumentality of] a foreign state or political subdivision thereof

. . . .

Such a reading of section 1603(b) is not only deeply confusing, but it is also inconsonant with the statute’s use of the term “political subdivision thereof” (since agencies or instrumentalities of a foreign state do not have “political subdivisions”). In other words, when section 1603(b) used the term “foreign state,” it was referring to foreign states proper – such as the Republic of Austria – and not to agencies or instrumentalities of a foreign state. That is, in fact, exactly what the FSIA’s legislative history demonstrates. See H.R. Rep. No. 94-1487, at 15 (1976) (stating that an agency or instrumentality must “be either an organ of a foreign state (or of a foreign state’s political subdivision), or that a majority of the entity’s shares or other ownership interest be owned by a foreign state (or by a foreign state’s political subdivision)”). It is also what the Supreme Court concluded in Dole Food Co. v. Patrickson, 538 U.S. 468 (2003), when the Court held “that only direct ownership of a majority of shares by the foreign state satisfies the statutory requirement [set forth in section 1603(b)(2)].” Id. at 474 (emphasis added).

There is, in short, no statutory support for OBB’s approach. Nothing in the FSIA indicates that a court first needs to examine section 1603(b) to determine whether the defendant (like OBB) is an agency or instrumentality of a foreign state, and then re-examine section 1603(b) to determine whether the putative agent is an “agency or instrumentality” of the “agency or instrumentality.” No court has ever adopted that type of circular analysis under section 1603, and for good reason: it makes no sense.

(3) OBB’s agency or instrumentality argument fails for another reason: it would render far too many entities incapable of being deemed an “agent” of a foreign state, and thereby deeply undermine the FSIA’s commercial activity exception.

Consider the following scenario: through individual intermediaries, a foreign state creates a separate corporation in New York State. The foreign state exercises extensive day-to-day control over the corporation, which engages in a series of commercial transactions in the United States. After the corporation’s conduct leads to multi-million dollar losses for a number of United States citizens, the individuals damaged file suit against the corporation and the foreign state. Their main jurisdictional argument under the FSIA is that the corporation was an agent of the foreign state through the latter’s exercise of day-to-day control, and that the corporation’s conduct is attributable to the foreign state for jurisdictional purposes.

Under OBB’s (mis)interpretation of section 1603(b), the plaintiffs in this scenario could not proceed against the foreign state itself because the corporation does not meet the definition of an agency or instrumentality under the FSIA. The corporation was created in New York, not in the foreign state, and therefore could never (under OBB’s theory) be an agent of a foreign state. See 28 U.S.C. § 1603(b)(3) (stating that an “agency or instrumentality of a foreign state” means any entity which, inter alia, “is neither a citizen of a State of the United States as defined in section 1332(c) and (e) of this title, nor created under the laws of any third country”). The same would hold true if the foreign state created the entity under the law of a third country, such as the law of the Bahamas or Panama. In fact, OBB’s formulation would provide a blueprint to foreign states about how to engage in commercial activity in the United States without risking the possibility of litigation: if the foreign state engages in commercial activity through a corporation created under the law of the United States or a third country, it will never be held to engage in commercial activity in the United States — even if the foreign state exercises day-to-day control over the corporation created, and effectively engages in extensive commercial activity in the United States through the nominally separate corporation.

OBB’s position, in other words, would profoundly undermine the effectiveness of the FSIA’s commercial activity exception. Where a foreign state dominates a separate corporation to such an extent that a principal-agent relationship is created, courts must be permitted to attribute the corporation’s conduct to the foreign state for jurisdictional purposes. Otherwise, the first clause of the commercial activity exception would contain a loophole that would swallow the exception itself.

[Next week, I will examine Sachs’s argument that OBB’s “overall commercial railway enterprise” satisfies the “commercial activity” requirement under the first clause of the FSIA’s commercial activity exception.]

During my regular review of FSIA cases, I am constantly surprised by the inattention paid to attribution.

For example, in LaLoup v. United States, No. CIV.A. 13-7124, 2014 WL 3361804 (E.D. Pa., July 10, 2014), the court assumed that Greece owned an item for purposes of the international takings exception because the item was owned by an agency or instrumentality of Greece. LaLoup, 2014 3361804, at *18. The court’s conclusion ignores a fundamental principle underlying the FSIA, namely that “government instrumentalities established as juridical entities distinct and independent from their sovereign should normally be treated as such.” First Nat. City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 626-27 (1983). If property is owned by an agency or instrumentality of a foreign state, it is not owned by the foreign state itself for purposes of the FSIA’s jurisdictional provisions – at least absent a principal-agent relationship or another basis upon which to disregard the agency or instrumentality’s separate legal status.

Attribution issues under the FSIA can be complex and can (as I have explained before) lead to confusion. However, courts and attorneys should follow a basic rule: if there are distinct legal entities involved under a plaintiff’s theory of the case, there is a lurking attribution issue. That issue must be addressed and resolved before the conduct or ownership rights of one entity can be freely imputed to another.

On May 19, 2014, the United States Supreme Court invited the Solicitor General to file a brief in OBB v. Sachs (No. 13-1067), a case that I have previously discussed. Given that Sachs involves the key issue of attribution under the FSIA — an issue that has not be addressed by the Supreme Court for over thirty years —it will be very interesting to see the Solicitor General’s response to the CVSG.

On March 5, 2014, OBB Personenverkehr AG (“OBB”) – an instrumentality of the Republic of Austria – filed a petition for a writ of certiorari seeking the Supreme Court’s review of the Ninth Circuit’s opinion in Sachs v. Republic of Austria, 737 F.3d 584 (9th Cir. 2013) (en banc). The matter is scheduled for conference on May 2, 2014. See United States Supreme Court Docket for OBB Personenverkehr AG v. Carol P. Sachs, No. 13-1067. While I have written about OBB’s argument regarding agency and attribution before, I wanted to revisit the issue in light of the pending Supreme Court proceeding.

The facts of the Sachs case are relatively straightforward. The plaintiff, a California resident, purchased a Eurail pass from Rail Pass Experts (“RPE”), an online ticket seller based in Massachusetts. RPE and OBB have no direct relationship; instead, RPE may be a subagent of The Eurail Group, an entity incorporated in Luxemburg whose membership comprises 30 rail carriers (including OBB). The plaintiff suffered severe injuries while trying to board a train in Innsbruck, Austria, that was bound for Prague. She sued OBB for her injuries.

There are several interesting legal issues in Sachs, but here I want to focus on the main argument that OBB raises in the Supreme Court. OBB argues that United States courts lack jurisdiction because the acts of RPE cannot be imputed to OBB. That contention is what one would usually expect from a defendant in such a case, since attribution is a critical issue under the FSIA in general (and under the first clause of the commercial activity exception in particular). But OBB goes one step further, claiming that courts must determine whether an entity is an “agent” of a foreign state by utilizing the “agency or instrumentality” test set forth in 28 U.S.C. section 1603. According to OBB, “to determine whether the acts of RPE were acts ‘by the foreign state,’ the Ninth Circuit should have looked to the definitions of ‘foreign state’ and ‘agency’ [in section 1603] to decide if RPE is an agent of OBB.” OBB’s Petition for a Writ of Certiorari, at 18.

OBB’s “agency” argument is meritless.

The term “agency or instrumentality” in section 1603 has nothing to do with attribution. Instead, section 1603’s definition of “agency or instrumentality” identifies which entities are entitled to the protections of the Foreign Sovereign Immunities Act. 28 U.S.C. § 1603. Section 1603 shows unequivocally that RPE is not entitled to foreign sovereign immunity, since it is a Massachusetts corporation. Cf. 28 U.S.C. § 1603(b)(3) (requiring a foreign state to be “neither a citizen of a State of the United States . . . nor created under the laws of any third country”). However, section 1603 does not address – much less resolve – the issue of whether RPE’s conduct is attributable to OBB.

OBB’s claim that the term “agency or instrumentality” in section 1603 refers to attribution ignores that the FSIA was not written on a blank slate. The statute used “agency or instrumentality” because it was a term of art long utilized by courts and commentators during the period preceding the FSIA in discussing whether an entity was entitled to foreign sovereign immunity. See, e.g., Et Ve Balike Kurumu v. B.N.S. International Sales Corp., 204 N.Y.S.2d 971, 974 (1960) (“where the corporation functions as a public agency or instrumentality or where evidence of corporate separateness from the government was not strong, immunity has been granted”); F.W. Stone Engineering Co. v. Petreolos Mexicanos, 42 Atl.2d 57, 60 (1945) (discussing immunity of foreign state “instrumentality”); United States of Mexico v. Schmuck, 56 N.E.2d 577 (1944) (discussing immunity of “public agency” of foreign state); Dunlap v. Banco Central Del Ecuador, 41 N.Y.S.2d 650, 652 (1943) (discussing immunity of “instrumentality” and “agency” of foreign government); Telkes v. Hungarian Nat’l Museum, 38 N.Y.S.2d 419 (1942) (holding that a suit is not maintainable if “the defendant is an agency or instrumentality of [a foreign state] exercising a governmental function”); Hannes v. Kingdom of Roumania Monopolies Institute, 20 N.Y.S.2d 825, 832 (1940) (stating that foreign sovereign immunity extends to “instrumentalities” of a foreign state); United States v. Deutsches Kalisyndikat Gesellschaft, 31 F.2d 199, 202 (S.D.N.Y.1929) (holding that “instrumentalities in which there are private interests” are not entitled to immunity); Molina v. Comision Reguladora Del Mercado de Henequen, 91 N.J.L. 382 (Supreme Court of New Jersey, 1918) (discussing the lack of immunity of “governmental agencies”); see also, e.g., Comment, The Jurisdictional Immunity of Foreign Sovereigns, 63 Yale L.J. 1148, 1152-53 (1954) (“Traditional doctrine grants immunity to government agencies, commissions, and other instrumentalities unless they have corporate personality.”); Bernard Fensterwald, Sovereign Immunity and Soviet State Trading, 63 Harv.L.Rev. 614, 619-20 (1950) (discussing distinction between incorporated and unincorporated “agencies” of a foreign government); Arthur Kuhn, The Extension of Sovereign Immunity to Government-Owned Commercial Corporations, 39 Am. J. Int’l. L. 772, 772 ( 1945) (“The distinction between agencies of foreign governments engaged in a public function and those which are engaged in purely private commercial transactions has long been recognized.”); cf. Note, Immunity from Suit of Foreign Sovereign Instrumentalities and Obligations, 50 Yale L.J. 1088, 1089 (1941); William C. Hoffman, The Separate Entity Rule in International Perspective: Should State Ownership of Corporate Shares Confer Sovereign Status for Immunity Purposes?, 65 Tul. L. Rev. 535, 546 (1991).

Consistent with the treatment of the agency/instrumentality issue before the enactment of the FSIA, the section-by-section analysis accompanying the first proposed iteration of the FSIA discussed the bill’s use of the term as follows:

An ‘agency or instrumentality’ of a state . . . could assume a variety of forms – a state trading corporation, a transport organization such as a shipping line or airline, or a banking activity. The traditional rule was that such agencies and instrumentalities of a foreign government were entitled to the same immunities as the government itself, especially if they engaged in clearly governmental activities.

Similarly, the FSIA’s House Report stated that “entities which meet the definition of an ‘agency or instrumentality of a foreign state’ could assume a variety of forms, including a state trading corporation, a mining enterprise, a transport organization such as a shipping line or airline, a steel company, a central bank, an export association, a governmental procurement agency or a department or ministry which acts and is suable in its own name.” H.R. Rep. No. 94-1487, at 15-16 (1976). The report made it clear that the agency/instrumentality definition set forth in section 1603 was intended solely to determine whether a particular entity was entitled to claim sovereign immunity. Seeid. at 15 (“An entity which does not fall within the definitions of sections 1603 (a) or (b) would not be entitled to sovereign immunity in any case before a Federal or State court. On the other hand, the fact that an entity is an ‘agency or instrumentality of a foreign state’ does not in itself establish an entitlement to sovereign immunity. A court would have to consider whether one of the sovereign immunity exceptions contained in the bill . . . was applicable.”). Nothing in the legislative history suggests that section 1603 was intended to address the issue of attribution.

Litigants’ past attempts to characterize section 1603 as setting forth the standard for attribution have not fared well. As the Fifth Circuit explained twenty-five years ago:

The FSIA uses [the term] to determine whether an “agency” of the state may potentially qualify for foreign sovereign immunity itself under the FSIA. This is a completely different question from that which we must address here: whether or not the [entity] enjoyed an alter ego relationship with the [foreign sovereign] so that it could bind [the sovereign] to a contract. Although such an alter ego relationship may be described in terms of “agency,” it is a completely different inquiry than that which might be conducted under § 1603.

Hester Int’l Corp. v. Fed. Republic of Nigeria, 879 F.2d 170, 176 (5th Cir. 1989); see also, e.g., Gates v. Victor Fine Foods, 54 F.3d 1457, 1460 n.1 (9th Cir. 1995) (same). In addition, the argument makes little sense: if OBB’s interpretation were accepted, a foreign state could freely use agents who did not meet the definition of section 1603 – such as individuals (cf.Samantar v. Yousuf, 560 U.S. 305, 314-19 (2010)) or a corporation in the United States or in a third country (cf. 28 U.S.C. § 1603(b)(3)) – and avoid jurisdiction even though the foreign state explicitly authorized the agent’s relevant conduct in the United States. Such an approach would create a hole that could swallow the doctrine of restrictive immunity, since foreign states would have an easy method through which to engage in commercial conduct without the risk of litigation.

In the end, OBB’s argument should be rejected. More importantly, with regard to whether OBB’s certiorari petition should be granted, it is clear that there is no circuit split (or conflict with Supreme Court precedent) with respect to the issue of section 1603 and attribution. In fact, all courts have agreed that section 1603 has nothing to do with attribution. Regarding this issue, at least, the Supreme Court’s decision in Sachs is easy: certiorari should be denied.

On appeal in the Ninth Circuit in Sachs v. Republic of Austria, et al., Case No. 11-15458, the Austrian instrumentality OBB Personenverkehr AG (“OBB”) argued that an entity’s conduct may be attributed to a foreign state under the FSIA only if that entity meets the “agency or instrumentality” requirements set forth in 28 U.S.C. section 1603(b). OBB contended that because the entity in question did “not fall within the agency definition” set forth in section 1603(b), the “acts of [the entity] cannot be imputed to OBB for purposes of Section 1605(a)(2).” OBB’s Supplemental Letter, dated Apr. 8, 2013, Docket No. 52, at 2. Because OBB’s erroneous argument has been made by litigants in FSIA cases before (see Gates v. Victor Fine Foods, 54 F.3d 1457, 1460 n.1 (9th Cir. 1995)), this post examines the issue more closely.

Under the FSIA, the term “‘foreign state,’ except as used in section 1608 . . . , includes a political subdivision of a foreign state or an agency or instrumentality of a foreign state as defined in subsection (b).” 28 U.S.C. § 1603(a) (emphasis added). An “agency or instrumentality” is defined as any entity which (1) “is a separate legal person, corporate or other,” (2) “is an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof,” and (3) “is neither a citizen of a State of the United States as defined in section 1332(c) and (e) of this title, nor created under the laws of any third country.” 28 U.S.C. § 1603(b). The term “agency or instrumentality” was intended to include entities such as “state trading corporation, a mining enterprise, a transport organization such as a shipping line or airline, a steel company, a central bank, an export association, a governmental procurement agency or a department or ministry which acts and is suable in its own name.” H.R. Rep. No. 94-1487, at 16 (1976).

Despite section 1603(a)’s sole reference to section 1608 – the FSIA’s service provision – the statutory scheme reflects different treatment of agencies or instrumentalities that extends well beyond service of process. For example, it is easier to establish jurisdiction under the international takings exception over an agency or instrumentality than it is over a foreign sovereign itself. See 28 U.S.C. § 1605(a)(3). The FSIA precludes recovery of punitive damages against a foreign sovereign, but not against an agency or instrumentality. 28 U.S.C. § 1606. And it is easier to attach or execute on the property of an agency or instrumentality than it is on the property of a foreign sovereign. Compare 28 U.S.C. § 1610(a) with § 1610(b).

As a result, the determination of whether an entity qualifies as a foreign sovereign or as an agency or instrumentality is an important one. However, contrary to OBB’s argument, the determination has nothing to do with the issue of attribution – i.e., common law “agency” – under the FSIA. Section 1603(b) was intended to delineate the entities entitled to the protections of the FSIA, but nothing suggests that the provision was meant to address attribution for purposes of jurisdiction or liability.

In contrast to the requirements of section 1603(b), “agency” for purposes of attribution is governed by common law principles as informed by international law and articulated congressional policies. First Nat. City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 623 (1983). For example, with respect to separate juridical entities, courts examine whether an entity is under the “day-to-day” control of a foreign sovereign. See, e.g., Dale v. Colagiovanni, 443 F.3d 425, 429 (5th Cir. 2006). In addition, an actual authority agency inquiry will typically turn on foreign law, since that will dictate whether the putative agent was in fact authorized to engage in the conduct alleged. See, e.g., Velasco v. Gov’t Of Indonesia, 370 F.3d 392, 401-02 (4th Cir. 2004); see also Fed. R. Civ. P. 44.1. And apparent authority is not permitted as an agency theory under the FSIA, for all of the reasons I have previously discussed. Plainly, all of these issues are far afield from the statutory inquiry set forth in section 1603(b).

OBB’s erroneous argument may have arisen from use of the term “agency” in the FSIA, which at first blush may appear to refer to common law “agency” principles. See Hester Int’l Corp. v. Fed. Republic of Nigeria, 879 F.2d 170, 176 n.5 (5th Cir. 1989) (“The use of the single term ‘agency’ for two purposes . . . may cause some confusion.”). However, as the Fifth Circuit explained long ago:

The FSIA uses [the term] to determine whether an “agency” of the state may potentially qualify for foreign sovereign immunity itself under the FSIA. This is a completely different question from that which we must address here: whether or not the [entity] enjoyed an alter ego relationship with the [foreign sovereign] so that it could bind [the sovereign] to a contract. Although such an alter ego relationship may be described in terms of “agency,” it is a completely different inquiry than that which might be conducted under § 1603.

The Ninth Circuit followed Hester in Gates, 54 F.3d at 1460 n.1. The Ninth Circuit recently reaffirmed Gates when it strongly rejected OBB’s argument in Sachs:

The plain text of the FSIA does not support OBB’s proposed framework for determining whether [the entity in question] is an agent of OBB. Section 1603(b) defines what type of entity can be considered a foreign state for purposes of claiming sovereign immunity. If an entity cannot show that it meets that definition then it is not entitled to sovereign immunity. Whether an entity meets the definition of an “agency or instrumentality of a foreign state” to claim immunity is a completely different question from whether the acts of an agent can be imputed to a foreign state for the purpose of applying the commercial-activity exception.

Because the term “agency” is used both under section 1603(b) and under the common law, the erroneous argument made by OBB in the Sachs appeal is capable of repetition. However, FSIA practitioners should be aware of the distinction, and thereby avoid this basic pitfall in FSIA law.

First, the district court emphasized that the commercial activity exception does not apply where the alleged commercial activity is unrelated to a plaintiff’s claims. Id. at *5; see also, e.g., Transatlantic Shiffahrtskontor GmbH v. Shanghai Foreign Trade Corp., 204 F.3d 384, 390 (2d Cir. 2000) (holding that the term “‘based upon’ [under the commercial activity exception] requires a degree of closeness between the acts giving rise to the cause of action and those needed to establish jurisdiction that is considerably greater than common law causation requirements”).

Second, the court followed Phaneuf v. Republic of Indonesia, 106 F.3d 302, 308 (9th Cir.1997), in holding that apparent authority is insufficient to confer jurisdiction over a foreign state under the commercial activity exception. TJGEM LLC, 2013 WL 6857988, at *6; see also The Second Circuit’s Apparent FSIA Authority.

District Judge Howell’s decision is interesting with respect to another issue that I have previously addressed on this blog. The district court held that to “survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(1), the plaintiff must establish the court’s jurisdiction over the subject matter by a preponderance of the evidence.” TJGEM LLC, 2013 WL 6857988, at *4. The TJGEM case is therefore the latest opinion to indicate that traditional subject matter jurisdiction procedural rules apply with respect to a plaintiff’s burden under the FSIA. See Peterson v. Islamic Republic Of Iran, 627 F.3d 1117, 1125 (9th Cir. 2010) (“It must fall to the plaintiff to prove that immunity does not exist.”); see alsoAm. Telecom Co., L.L.C. v. Republic of Lebanon, 501 F.3d 534, 537 (6th Cir. 2007).

Agency is deeply enmeshed with FSIA jurisdiction. Because jurisdiction over a foreign state generally requires an act by the state, the question of whether an exception to immunity applies will often turn on whether the conduct of an individual – for example, an official, employee or agent – is attributable to the sovereign. Since jurisdiction is the key legal issue in FSIA cases, the need for clear rules relating to agency is paramount. Cf. H.R.Rep. No. 94-1487, at 32 (discussing “the importance of developing a uniform body of law in this area [of foreign sovereign immunity]”).

Unfortunately, FSIA jurisprudence does not provide the needed clarity with respect to agency. In this post, I will examine one of the agency problems in FSIA cases: whether an individual’s apparent authority to act on behalf of a foreign state is sufficient to give rise to subject matter jurisdiction under the commercial activity exception. As will be shown below, the Second Circuit’s unclear precedent on the issue of apparent authority unnecessarily gives rise to confusion and lack of uniformity. The issue should be litigated in the Second Circuit at the earliest opportunity.

The Ninth, Fourth and Fifth Circuits have all squarely held that apparent authority is insufficient to give rise to jurisdiction under the commercial activity exception. SeePhaneuf v. Republic of Indonesia, 106 F.3d 302, 308 (9th Cir. 1997) (“We hold that an agent must have acted with actual authority in order to invoke the commercial activity exception against a foreign state.”); Velasco v. The Gov’t of Indonesia, 370 F.3d 392, 400 (4th Cir. 2004) (“we concur with the position of the Ninth Circuit and hold that the commercial activity exception may be invoked against a foreign state only when its officials have actual authority”); Dale v. Colagiovanni, 443 F.3d 425, 429 (5th Cir. 2006) (“We agree with the Fourth and Ninth Circuits that an agent’s acts conducted with the apparent authority of the state is insufficient to trigger the commercial activity exception to FSIA.”) [Author’s Note: I represented the foreign sovereign in the Dale district court and appellate proceedings].

There are two basic reasons for the rule. First, “[a]ll three clauses of the [commercial activity] exception require ‘a commercial activity of the foreign state.’” Phaneuf, 106 F.3d at 307, quoting 28 U.S.C. § 1605(a)(2) (emphasis in original). That language “clearly entails commercial activity in which the foreign state is engaged.” Id. “If the foreign state has not empowered its agent to act, the agent’s unauthorized act cannot be attributed to the foreign state; there is no ‘activity of the foreign state.’” Id. at 308, quoting 28 U.S.C. § 1605(a)(2); see alsoDale, 443 F.3d at 428.

Second, “courts analyzing the sovereign immunity of the United States have held consistently that the act of an agent beyond what he is legally empowered to do is not binding upon the government.” Velasco, 370 F.3d at 399; see alsoLarson v. Domestic & Foreign Commerce Corp., 337 U.S. 682, 689 (1949); Fed. Crop Ins. Corp. v. Merrill, 332 U.S. 380, 383-84 (1947). Under basic principles of comity, similar principles apply to preclude foreign sovereigns from being drawn into litigation based upon the unauthorized acts of individuals. See, e.g., Long v. The Tampico & Progresso, 16 F. 491, 495 (S.D.N.Y. 1883) (“By international comity, and that tacit agreement which constitutes the law of nations, every government accords to every other friendly power the same respect to its dignity and sovereignty . . . which it enjoys itself within its own dominions.”); see alsoVelasco, 370 F.3d at 399; Phaneuf, 106 F.3d at 308.

While there is broad agreement among three circuit courts, the Second Circuit has twice assumed that apparent authority would be sufficient to confer jurisdiction under the FSIA. SeeFidelity Bank, N.A. v. Gov’t of Antigua & Barbuda-Permanent Mission, 877 F.2d 189, 193-94 (2d Cir.1989); Reiss v. Societe Centrale du Groupe des Assurances Nationales, 235 F.3d 738, 748 (2d Cir. 2000). However, because First Fidelity and Reiss did not address the issue directly, it is arguable that neither constitutes binding precedent. See Estate of Magnin v. CIR, 184 F.3d 1074, 1077 (9th Cir. 1999) (“When a case assumes a point without discussion, the case does not bind future panels.”); Matter of Stegall, 865 F.2d 140, 142 (7th Cir. 1989) (“A point of law merely assumed in an opinion, not discussed, is not authoritative.”); Am. Portland Cement Alliance v. EPA, 101 F.3d 772, 776 (D.C. Cir. 1996) (“[J]urisdictional issues that were assumed but never expressly decided in prior opinions do not thereby become precedents.”); see also Phaneuf, 106 F.3d at 308 n.4 (stating that First Fidelity “assumed the appropriateness of invoking the commercial activity exception based on apparent authority” and “gave no analysis or explanation of its statements regarding apparent authority”); Dale, 443 F.3d at 429 (stating that only the Fourth and Ninth Circuits had previously “directly addressed the issue”). Nevertheless, district courts in the Second Circuit have adopted the apparent authority approach, and courts outside the circuit have recognized a circuit split. See Storr v. Nat’l Defence Sec. Council of Republic of Indonesia-Jakarta, 95 CIV. 9663 (AGS), 1997 WL 633405 (S.D.N.Y. Oct. 14, 1997) aff’d sub nom. Storr v. Nat’l Def. Sec. Council, 164 F.3d 619 (2d Cir. 1998); see also, e.g., EduMoz, LLC v. Republic of Mozambique, — F. Supp. 2d —, CV 13-02309 MMM CWX, 2013 WL 5040937, at *17 n.82 (C.D. Cal. Sept. 10, 2013). And there have been efforts to harmonize the different opinions, including a recent decision in the Southern District of New York that would embed a public vs. private analysis into the equation – which would likely deepen rather than alleviate any confusion. See Themis Capital, LLC v. Democratic Republic of Congo, 881 F. Supp. 2d 508, 522-26 (S.D.N.Y. 2012).

The issue of apparent authority is critical, because it can make all the difference on the question of FSIA immunity. For example, the plaintiffs’ cases in Phaneuf, Velasco and Dale all fell apart once apparent authority was taken off the table. See, e.g., Phaneuf v. Gov’t of Indonesia, 18 Fed. Appx. 648, 650 (9th Cir. 2001); Velasco, 370 F.3d at 400-02. On such an important issue, a circuit split – or, in this case, an apparent circuit split – should be resolved as soon as possible. See, e.g., Vencedora Oceanica Navigacion, S.A. v. Compagnie Nationale Algerienne de Navigation, 730 F.2d 195 (5th Cir. 1984) (“[I]t is highly desirable to avoid circuit conflicts in the sensitive area of sovereign immunity.”).

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Alexis Haller is a trial and appellate attorney with over thirteen years of FSIA litigation experience. Mr. Haller has achieved dismissals in numerous FSIA actions, and has successfully represented a foreign head of state and foreign diplomatic agents.
Mr. Haller graduated from Princeton University summa cum laude in 1995 and obtained his juris doctor degree from Stanford Law School in 1998. He is a member of the bars of the District of Columbia and California, and is admitted to practice before the United States Supreme Court and various United States courts of appeals.